Hugh Hendry - China Will Be Last Shoe to Drop

This makes us bearish on most Asian stocks, bearish on industrial commodity prices, interested in some US stocks, a seller of high variance equities and deeply concerned that Japan could become the focal point of the next global leg down.

Read it at Scribd
The Eclectica Fund - April 2012 Commentary
By Hugh Hendry
(h/t The Big Picture)


Hendry’s fund has generated remarkable returns over the past decade with ridiculous outperformance during downturns. This is his first lengthy commentary in more than a year and having established his spot amongst the very top macro managers (thinkers), the entire piece is worth reading. If you weren’t convinced of a coming hard landing in China previously, Hendry’s thorough analysis will put those doubts to rest.




Update: Hendry's presentation at The Milken Institute conference yesterday can be found here:
Hugh Hendry On Europe "You Can't Make Up How Bad It Is"

Satyajit Das: The European Debt Crisis Redux

the LTRO does not solve the longer term problems of the solvency or funding of the banks, which now remain heavily dependent on the largesse of the central banks. It is government sponsored Ponzi scheme where weak banks are supporting weak sovereigns who in turn are standing behind the banks – a process which can be best described as two drowning people clinging to each other for mutual support.

Read it at Naked Capitalism
The European Debt Crisis Redux
By Satyajit Das


Ponzi schemes can continue far longer than most expect, but eventually all such schemes are revealed and losses must be accepted. The question remains, in this instance, who will be forced to accept the losses...Bank creditors or public taxpayers? My bet remains on the latter.

Ann Pettifor - "credit creates economic activity"

The fact is, and it has been so since 1694, when a borrower approaches a bank for a loan, the funds for the loan are not in the bank. They are created when, after assessing risk, a bank clerk enters the loan amount into a ledger, demands collateral; sets the rate of interest on the loan and after agreement has been reached, transfers the funds – as ‘bank money’ – from the bank’s account to the borrower’s account. This loan creates a deposit in the borrower’s account. Loans create deposits. Credit creates money.

It gets better: credit creates economic activity. This is why I consider the creation of a sound banking and credit system to be a great civilizational advance. In countries without sound banking and credit systems, it is very hard to kick-start and sustain economic activity, through investment and job creation.

It’s because we have a sophisticated monetary system and a well-developed (if badly regulated) banking system – that we can afford to tackle climate change.

There is no shortage of money. There may be a shortage of skills; of regulation; of commodities; of land; of water and atmosphere – but there need never be a shortage of money.

Read it at Debtonation
Ann Pettifor: speech notes for presentation to the Just Banking Conference, Edinburgh, 20th April, 2012
By Ann Pettifor
(h/t Tom Hickey at Mike Norman Economics)

Brilliant piece focusing on private credit creation and the enormous overhang of private debt that continues to depress economic growth. Sadly, the five tools for recovery do not appear politically feasible in the current state. Of those tools, however, I strongly favor a re-structuring of the banking sector that recognizes insolvency combined with a debt jubilee for households.

Earnings Beat But Growth Slows

S&P 500 Estimate Beat Rate and Earnings Growth Rate

Source: (The Reformed Broker)

Headlines consistently hype the high percentage of companies beating 1Q earnings expectations. What they don’t say is that more than 50% of companies have beat expectations in nearly every quarter for the past 20 years. Companies are becoming increasingly savvy at using obscure accounting methods to massage quarterly earnings results. Separately, most analysts now focus on what is termed, adjusted earnings, which seemingly allows companies to include one-time accounting gains while disregarding one-time losses.

Even if we take reported earnings at face value, the growth rate has clearly been slowing over the past two years. Although most companies will almost certainly continue to beat expectations, The Forthcoming Profit Recession may be approaching.  

What is Austerity?

Anyone watching, listening or reading the news over the past few years has certainly heard the term “austerity” used more frequently than they probably imagined possible. In our minds, each of us likely has a particular interpretation of what “austerity” means and applies that view broadly across different instances. Unfortunately, if you pay close attention to the word’s usage it becomes clear that many very intelligent people are using the term with distinctly different meanings.
 
Earlier today, Peter Tchir of TF Market Advisors posed the question “When Did Austerity Become A 4 Letter Word?“ Tchir notes that:

In the rush to avoid supporting anything that could be viewed as “austerity” we have lost sight of what austerity is, and how it can impact the economy.

Although the latter topic is certainly worthwhile, answering the former question is more pressing issue (IMO).

Quoting from the Wikipedia page on Austerity :

In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided.

This definition conflicts with several ways I’ve seen and interpreted the term being used recently.

Jeff Madrick at TripleCrisis describes “austerity economics” as (No Mysteries in Eurozone Crisis) “higher taxes and reduced spending.”

Separately, in a post titled American Austerity, Paul Krugman points to “de facto austerity” under Obama in “an era of huge cuts in public employment compared with previous experience.” Krugman suggests that austerity is simply reducing the public workforce. He may be assuming that this lowers spending or the deficit, however data doesn’t support that view. In fact, US federal spending and deficits (in nominal terms) were higher in 2011 than in 2010 and are expected to increase again in 2012. (OMB Historical Table 1.1)

Before even attempting to discern the impact of “austerity” on an economy, it seems imperative to formulate a consistent meaning for the term. Must “austerity” include all the characteristics listed by Wikipedia? Is providing more public services and benefits for less money “austerity”? How about cutting the deficit without lowering spending (increasing taxes)? Does deficit-cutting and lower spending refer to nominal values or a percentage of GDP? What about a reduction in public employment?

My own personal view has been that “austerity” refers to attempts at reducing the deficit, regardless of the method. What are your views? How should we interpret “austerity”?




Update: On Friday I posed this question to Cullen Roche over at Pragmatic Capitalism in his new Q&A (which I highly recommend). Here is his response:

WOJ:  Speaking either for yourself or MMR (or both), how would you define austerity? Are there specific measures involved or is it simply a policy goal?

CR:  To me, austerity is an insufficient budget deficit.  That depends on specifics in each nation, but in the USA for instance, austerity might involve a budget deficit that is not in excess of the current account deficit.  That would result in a net drag on the country.  We’re not imposing austerity in the USA though.

A Reason to Take More Vacation

People love looking forward to vacations, they don't like the vacation that much while they're on it, and then they love the memories. Most of the joy--the utility in econospeak--happens when you're not having the experience.

Vacation purchases jump around just the way you'd expect if they were a durable: People spend a lot less on them during recessions, about 15% less in the Great Recession.

Read it at The Atlantic
Memory As A Consumer Durable
By Garrett Jones


As someone who values vacations (largely because of the memories) significantly more than most durable goods, I was drawn in by the quote above. Having just attended my 5 year reunion at Washington University in St. Louis, the emotions of being excited leading up to the vacation and sentimental looking back are very present (I enjoyed the vacation too). These feelings also played a meaningful role in boosting my spirits after losing a job during the last recession. Equally persuaded by much of the work in psychology, I think Jones hits on an important point in recognizing the frequent undervaluation of experiences and memories.

During periods of economic stress, vacations can play an important role in countering negative emotions. By being conscious of the durability of memories, hopefully people will be less apt to forgo taking trips. The result could be a significant boost to the stability of happiness.   

Johnson - American Taxpayer Liabilities Just Went Up, Again – Why Isn’t Congress Paying Attention?

The I.M.F. represents a contingent liability to taxpayer sin the United States – much as the Federal National Mortgage Association (known as Fannie Mae) and Freddie Mac (formerly the Federal Home Loan Mortgage Corporation) have in the past — and as too-big-to-fail mega-banks do now.

Read it at The Baseline Scenario
American Taxpayer Liabilities Just Went Up, Again – Why Isn’t Congress Paying Attention?
By Simon Johnson


The IMF’s funding, similar to public corporations, comes through both equity and debt financing. By ratcheting up debt financing through recent commitments, the IMF is effectively increasing leverage and the risks to equity holders, of which the US is the largest. Although IMF loans remain senior to practically all other liabilities, the underlying reality is that these decisions further add to systemic risk in the global financial system. As global finances become more intertwined and built on leverage, the potential for unexpected events to end in really bad outcomes grows.

Stiglitz - Austerity, and a New Recession?

The diagnosis is that politics is at the root of the problem: That is where the rules of the game are made, that is where we decide on policies that favor the rich and that have allowed the financial sector to amass vast economic and political power. The first step has to be political reform

Read it at The European
Stiglitz - Austerity, and a New Recession?
Interview with Joseph Stiglitz (h/t INET)


Very good interview with Stiglitz on the current crises in Europe, the US and economics. Stiglitz recognizes the importance of and need to include credit in monetary economics, as well as the underlying currency issue at the heart of Europe’s troubles. His willingness to portray politics as the heart of the problem is a bit surprising and should certainly be commended. Unfortunately I share his fear that economic outcomes in both the US and Europe will have to get significantly worse before any real change occurs.

Changing Our Basic Assumptions of Monetary Policy

It remains true that if there is inflation because there is too much spending-money, then the quantity of spending-money should be reduced. That is not true, however, if there is inflation because there is too much credit-use.

And it remains true that credit-use is good for growth when there is little credit-use. But when credit-use is already excessive, when debt is already excessive, increased credit-use is not likely to be an effective way to boost growth.

Even before policy can change, our basic assumptions must change.

Read it at the New Arthurian Economics
Something's Missing
By The Arthurian


Focusing solely on base money creation has led many individuals to incorrect predictions about inflation over the past several years. The amount of credit outstanding is a large multiple of spending money currently in the system (and of base money). Declining credit use has been a major deflationary force during the past few years and excessive debt continues to pose significant risks for future economic growth. Meanwhile, government policies continue to encourage increasing credit-use, not recognizing the futility of these actions in solving a crisis caused by excessive credit. The Arthurian is spot on in expressing that our assumptions about monetary policy must change before any lasting resolutions can begin.

Barro - How to Fix the Social Security Solvency Crisis for Just $49.99

Or, we could just admit that the Trust Fund balance is arbitrary and bears no meaningful relationship to the government’s ability to pay Social Security benefits.

Read it at Forbes
How to Fix the Social Security Solvency Crisis for Just $49.99
By Josh Barro


Government spending, for currency issuers, is never revenue constrained. The decision to continue paying Social Security benefits, at any level, is ultimately a political choice about the desired amount of government spending and the portion of that amount which is dedicated to Social Security.

Boettke - Is It True that Economists Often Mistake Beauty for Truth?

It is necessary for economists to develop the skill to think within the alternative frameworks, as well as to question the coherence and the evidence marshalled for the different perspective.  This is our challenge.

Read it at Coordination Problem
Is It True that Economists Often Mistake Beauty for Truth?
By Peter Boettke


Two weeks ago I had the privilege to experience a class on advanced Austrian economics taught by Dr. Boettke. This quote highlights a primary reason for my excitement in the opportunity to witness his classroom environment. Needless to say, the experience did not disappoint as students were clearly free to engage and question the perspectives of each other, as well as Dr. Boettke. Feeling encouraged and at home in this type of environment, I was officially convinced to pursue my PhD in Economics at George Mason University. I fully accept and look forward to the challenge of understanding an array of frameworks, while always remaining open to questions about the merits of different views.

Pain in Spain is Only Beginning

Spain’s housing prices will fall by an additional 35%

Read it at The Big Picture
The Pain in Spain
By Carmel Asset Management (from John Mauldin)


Yields on Spanish sovereign debt are once again lower today following ‘successful’ auctions for short-term bills. The last two weeks have seen strong rallies following these Tuesday bill auctions, only to witness further selling after Spain fails to meet expectations selling longer-term bonds later in the week. There is no reason to believe this week will prove any differently although there does appear to be resistance around the 6% level for 10-year bonds, possibly from ECB pressure.

While Spain has already rolled over a significant amount of maturing debt in 2012, the large percentage of short-term debt only pushes the timeline out a small amount. Based on the recent PMI data and weakness throughout Europe, chances are high that Spain will miss already revised budget deficit expectations for 2012. I also continue to expect that GDP expectations for 2012 and 2013 will prove overly optimistic. Given the positive start to 2012, Spain may be able to avoid an EU bailout in 2012. However, the pain in Spain will continue to get worse and unless there is a big policy shift in the EU or ECB, a bailout in 2013 appears increasingly likely.

Peterc - Reform or Revolution, MMT or Marx

The Keynesian, like the Marxist, recognizes that capitalism is inherently flawed and that left to its own devices it cannot stand. It is only by overriding its internal logic, whenever necessary, through the implementation of deficit spending not dictated by the profit motive that the system can be preserved for the benefit of capitalists, and most Keynesians apparently choose to support policies to prop up the system in this way.

Read it at heteconomist
Reform or Revolution, MMT or Marx
By peterc

Fed's Treasury Purchases Now About Asset Prices, Not Interest Rates

Earlier today Arnold Kling at EconLog questioned a Keynesian view of the bond market in a post titled Interest Rates: The Strange Interlude. Kling points out the currently held Keynesian view that “there is a shortage of safe assets.” Describing the current economic troubles around this shortage suggests that governments should increase deficits in order to supply the market with enough ‘safe’ assets to fulfill demand. In response to this view, Kling asks (bold-mine):

if the markets love government debt and crave safe assets, then why does the Fed have to buy such a large share of what the Treasury issues?

What struck me about this question was the notion that the Fed has to buy a large amount of Treasuries to hold interest rates low. The implication in this statement is that if the Fed did not buy Treasuries at the current price than other investors would not step up to meet the supply. I take a slightly different approach to questioning the Fed’s actions (which I posted as a comment on the site).

“I think one could argue that the Fed's purchase of Treasuries is not solely about interest rates. By removing Treasuries (safe assets) from the private sector, the Fed is encouraging investors to purchase the next closest 'safe' assets.

If the Fed was not doing various forms of QE, it's possible the private sector would have taken up the slack to keep rates low. However, in that case, money may have shifted to Treasuries instead of stocks and other categories of debt. The result would be low rates but also a lower stock market (reduced wealth effect).”

From my perspective, the Fed has been implicitly trying to boost asset markets and confidence through QE because it’s ability to influence real economic growth has been limited since reaching the zero bound on interest rates. The hope is that feeling wealthier will encourage the private sector to increase consumption and provide a short-term boost to the economy that gets growth back on track.

Kling later comments that:

For Keynesians, the low interest rates on U.S. securities are a sign from the markets that it would be a good idea to issue more debt. The rest of us doubt that the Fed could hold interest rates down forever.

Ignoring for a moment the very real potential downside of expanding government, my reply would be this: even if the Fed can hold interest rates down forever, will they be able to prop up other asset markets (e.g. stocks) forever? The Greenspan put lasted for quite a long time but ultimately failed miserably. Will the Bernanke put fair any better?

(Note: I remain long Treasuries)

Bonds Remain the Contrarian Play

“The world is very bearish on bonds.  It is hard to make a case for value in the bond market.  Our only concern is this bearishness is well understood and has been priced into the market for a while now.  The long bond has had a 34% total return in the last 12 months versus a 5.1% return for the S&P 500 over the same period. The bond market has also outperformed stocks over the last 30 years for the first time since the Civil War.
At some point the bond bears are going to be right. But after a decade of crying wolf, it is hard to listen to these calls.”

Read it at The Big Picture
More Bond Haters
By James Bianco

Anyone who has taken a class in finance will tell you that the stock market has to outperform bonds over the long-term to make up for the higher risk being taken. But how long is the long-term? Recent history shows that it must be longer than 30 years, which is probably longer than the time horizon of most investors. The following chart shows the portfolio allocation of investors in the AAII Survey (h/t PRAGMATIC CAPITALISM):


Despite the extreme outperformance of bonds during this period, allocations have remained relatively constant with a nearly 40% current differential between stocks and bonds. The current bearishness noted in the article has existed over this entire period and certainly should be well priced in by now.

The lingering fear for bond investors is whether inflation will push higher in the coming months and years. As Steve Randy Waldman highlights in the previous post, Depression is a choice, our current political choice clearly favors creditors and a low-inflation environment. Based on this view of political actions and the remaining over-indebtedness of households, I continue to believe that fears of higher inflation are also misplaced. In this light, long-term Treasury bonds will likely continue to provide returns competitive with stocks for the next few years.

SRW: Depression is a choice

“We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives.”

Read it at Interfluidity
Depression is a choice
By Steve Randy Waldman


When considering the future actions of politicians, in the US, Europe and other democratic developed nations, it is imperative to recognize that political and economic calculations may not always be aligned. Waldman lays out the case that attempting to improve economic growth at the risk of increasing inflation is currently, politically undesirable. This view, which I share, is a significant reason for pessimism, in the short-run, until political priorities are ultimately altered.  

Quote of the Week

...is from Matt Ridley’s superb book, The Rational Optimist: How Prosperity Evolves (P.S.)

Today, of Americans officially designated as ‘poor’, 99 percent have electricity, running water, flush toilets, and a refrigerator; 95 per cent have a television, 88 per cent a telephone, 71 per cent a car and 70 per cent air conditioning. Cornelius Vanderbilt had none of these.

Last week I decided to buck the recent trend of pessimistic posts and show that I remain a long-term rational optimist in the post, Forecasting Errors are Optimistic for Life. Ridley’s book is a remarkable attempt to recognize how many obstacles humans have overcome throughout history and provide a solid foundation for understanding why the future remains just as bright.

The quote above is not meant to diminish current problems of inequality but rather to point out that ‘poor’ Americans today have access to many goods that were unthinkable only a generation or two ago. In my view, these comparisons to the past are too frequently neglected in light of the income and wealth inequality we see today. The prosperity of Americans is not simply due to luck, but rather the comparatively unrestricted ability to innovate and exchange ideas. As Ridley points out:  

The more you prosper, the more you can prosper. The more you invent, the more inventions become possible. How can this be possible? The world of things – of pecans or power stations – is indeed often subject to diminishing returns. But the world of ideas is not. The more knowledge you generate, the more you can generate. And the engine that is driving prosperity in the modern world is the accelerating generation of useful knowledge.

Looking at the world today, new forms of social media (e.g. Google, Facebook, Twitter) are permitting ideas to be shared across the globe in ways few could have envisioned. These technologies have already helped topple oppressive regimes in the Middle East and will almost certainly lead to miraculous advances in medicine. As new individuals come online each day, the potential for new ideas continues to grow. Ridley notes:

The wonderful thing about knowledge is that it is genuinely limitless. There is not even a theoretical possibility of exhausting the supply of ideas, discoveries and inventions. This is the biggest cause of all for my optimism. It is a beautiful feature of information systems that they are far vaster than physical systems: the combinatorial vastness of the universe of possible ideas dwarfs the puny universe of physical things.

Considering the history of humans and America, I share Ridley’s optimism for the future even though very real problems are present in our world today.

As Paul Romer puts it: ‘Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered.’

Therefore I would encourage others to remember how far we’ve come and all that we have today, when bombarded by pessimistic headlines about a falling American empire or an end to global prosperity. We live in an incredibly creative and dynamic world, from which new ideas will continuously develop to overcome our problems. The future remains as bright, if not brighter than ever.

Points of Public Interest

For all those who finished their taxes early this year, here are some worthwhile articles for your weekend reading:

1. The Ten Pillars of Economic Wisdom (EconLog)
2. All the best tax breaks are Made in America (FT Alphaville)

Media and political focus on marginal income tax rates continues to obscure any real discussion about the myriad of ways the tax system is intentionally tweaked to protect wealthy individuals and companies. In tax laws, just as in finance, the US continues to win the race to the bottom.

3. David Kotok: I’m Worried (TBP)

Will our persistent political focus on short-term expedients result in long-run problems that ultimately overwhelm any further short-term solutions?

4. Will U.S. Avoid Recession in 2012? (Bloomberg)

Legendary investor Gary Shilling offers his outlook on a possible US recession in 2012. He concludes a recession will begin this year and continues to recommend investing in long-term Treasury bonds (both points I agree with).

5. Why Obama's JOBS Act Couldn't Suck Worse (Rolling Stone)
6. Soros: Reversing Europe’s Renationalization (Project Syndicate)

After years to trying to become financially integrated, the recent crisis is pushing many countries in the opposite direction. Renewed concerns about Spain and Italy may speed up this process that could lead to several defections from the EU.

7. Rajan: The Trouble with Libertarian Paternalism (Project Syndicate)
8. Forcing Both Parties to Get Specific About What Government Should Do (Next New Deal)

Unrelated to economics, if you have a few minutes definitely watch this video (whether you like Nike or not):
Sickest Nike Commercial Ever

Spain’s stock market back to 2009 lows...No recovery there! (h/t Zero Hedge)

Forecasting Errors are Reason for Optimism

Over the past several weeks, maybe even months, the tone of many posts has been relatively pessimistic. This is not my stated intention, but rather a consequence of a naturally contrarian viewpoint facing off against an extremely bullish tide of economists and investors. While my current view on US stock markets and global economic growth over the next couple years remains bearish, my long-run expectations for society align with my general disposition as a rational optimist. (Quick note: I highly recommend reading The Rational Optimist: How Prosperity Evolves (P.S.) by Matt Ridley)

Forecasting errors in economics are frequent, and for good reason, since reliable predictions based on the future actions of human beings are extremely difficult, if not impossible. Institutions often muddy these attempts by imposing pressure on forecasters to offer predictions that benefit the political, social and economic standing of individuals, groups and political parties. For these reasons corporate earnings forecasts, year-end stock market outlooks, and economic growth projections often have an upward bias. Contrary to these often overly optimistic opinions, forecasts for life expectancy growth are consistently too pessimistic. This morning Timothy Taylor asked the question “What if Life Expectancy Grows Faster?” Taylor quotes a recent report from the IMF, Chapter 4: "The Financial Impact of Longevity Risk, which states that:

“forecasters, regardless of the techniques they use, have consistently underestimated how long people will live. These forecast errors have been systematic over time and across populations. ... In fact, underestimation is widespread across countries: 20-year forecasts of longevity made in recent decades in Australia, Canada, Japan, New Zealand, and the United States have been too low by an average of 3 years.”

Think about that for a moment. Although 3 years may sound trivial to some, my personal view is that few things in life are more valuable than extra time.

Taylor and the IMF primarily focus on the extra costs associated with unexpected increases in life expectancy for pensions and other retirement benefits. Rather than focus on that negative aspect, I think it’s important to recognize that in spite of all the wars, economic crises and other struggles over the past 100 years, life expectancy continues to move significantly higher (chart below from IMF report):

These projections alone are reason enough to be optimistic, but the potential that they vastly understate life expectancy growth into the future is truly exciting!

Finding Common Ground

Steve Randy Waldman recently penned an encouraging post on the recent, heated debates in the econ blogosphere, posing the question, “Because the stakes are so small?” Waldman’s question refers to the common desire amongst various schools of economics to improve the current status quo in monetary and fiscal macro policy. The stakes in this game are a world with greater economic growth and less uncertainty about the future, goals that are certainly well worth the effort.

Waldman is the ultimate student of economics, striving to understand the strengths and weakness of different theories spanning Post-Keynesian, Market Monetarism, New Keynesian, MMT, Austrian and surely others. From his perspective, proponents of the different theories have much to gain from finding areas of common ground rather than arguing over their differences. The article offers a jumping off point for this discussion and is well worth a full reading.

The desire to highlight this blog post, in particular, is because my own intellectual pursuit in economics continues to include all of the various sects listed above. I’m often struck by the amount of overlap in thought process and general policy prescriptions, even if the details are, at times, worlds apart. Stemming from my personal experience, Post-Keynesians and Austrians often agree on the importance of private bank credit in determining business cycles. Market Monetarists and MMTers recognize the interplay and sometimes counteracting effects of monetary and fiscal policy. Nearly all the groups seem to prefer making both types of macro policy less ad hoc and more quickly responsive to business cycles. This is just the tip of the iceberg and I hope to read about and find far more similarities as I continue my studies.

Speaking of studies, I’m currently faced with the dilemma of choosing between two doctoral programs in economics that promote different types of heterodox economics. One program is more closely aligned with the Post-Keynesians, while the other is associated with the Austrian tradition. Waldman’s post offers hope that whichever program I chose, the opportunity will remain open to incorporate the best ideas among alternative theories. I certainly plan to seek alliances in my career and sincerely hope that many leaders in the field will follow Waldman’s lead in finding some common ground that helps improve outcomes for us all.  

Quote of the Week

...is from page 5 of Milton and Rose Friedman’s classic book, Free to Choose: A Personal Statement:

In the government sphere, as in the market, there seems to be an invisible hand, but it operates in precisely the opposite direction from Adam Smith's: an individual who intends only to serve the public interest by fostering government intervention is "led by an invisible hand to promote" private interests, "which was no part of his intention."

News headlines over the past few weeks have been rife with examples of the invisible hand in reverse that the Friedman’s highlight. The Jumpstart Our Business Startups (JOBS) Act that was signed into law this week exempts small, newly public companies (those with less than $1 billion in revenues...seriously?!) for 5 years from disclosing executive compensation, having “an auditor attest to their internal financial controls” and “comply[ing] with all the accounting rules required of public companies today.” Further, “banks underwriting their IPOs may be able to issue research reports on the stocks ahead of the offerings, a practice prohibited a decade ago after analysts pumped dot-com stocks their firms were helping take public.” While this bill may encourage more companies to become public, it also promotes several types of fraud that have cost investors dearly over the years.

Apart from the JOBS Act, the current debate over the individual mandate is in part due to the stranglehold on Congress held by private health insurance companies. Instead of creating a single-payer health care system, the current bill protects and improves the position of health insurance companies by mandating the entire population by their products.

These are just two recent examples but there are countless others that include special tax breaks for oil companies, bailouts of automotive companies and lax capital requirements for banks. This is not to suggest that individuals’ in government purposefully seek to promote the interests of a few over the many, but rather that the structure of the institutions and personal desire for re-election lead to this outcome.

From an economic perspective, I agree with many individuals on the left that large budget deficits currently continue to play an essential role in reducing unemployment and promoting economic growth. However, in light of this view, it is important to remember that big government increases the returns to and proliferation of crony capitalism. Weighing the benefits and costs of these options is rarely easy, but the wonderful aspect is that we remain “free to choose.”

Points of Public Interest

Here are some of this week’s best for your holiday weekend reading...

1. Gold does Nothing

Why is gold so valuable? Many value investors struggle with owning gold because it produces nothing as an asset. However, gold may be valuable simply for the fact it doesn’t produce anything. Gold has held a special role in storing wealth for centuries and that luster is unlikely to dwindle anytime soon. That being said, a global slowdown that results in disinflation or outright deflation will pressure prices at these levels.

2. Finance as Wealth Transfer Mechanism: An Interview with James Galbraith

“When you look at income inequality, it’s clear that the major driver is the movement of the stock market, especially the NASDAQ. But that’s capital- asset valuations; it’s not “demand for skill.” I’ve often said it’s actually redundant to measure income inequality in the US. You can watch it go by on cable TV, on the stock ticker.”

With the Federal Reserve now explicitly targeting higher stock prices it should come as no surprise that income inequality has quickly returned to peak levels in the past couple years.

3. Why Google, and Simple, love TxVia

Google has made countless great acquisitions over the past several years and remains a step ahead of the rest. TxVia is a potentially huge source of consumer information from prepaid debit cards.

4. Is the Court Engaging in Activism if It Strikes Down ObamaCare?
5. EZ Break-Up Stands to Benefit the Core

Europe’s sovereign debt problems are once again returning to headlines as growth slows, unemployment rises and debt yields for Spain and Italy shoot higher. Over the past few years politicians and pundits alike have constantly argued that a break-up of the Eurozone would be a disaster. The reality is likely much different and may in fact strengthen ties among core countries.  




State and local income taxes are highly regressive:




Source: Citizens for Tax Justice (h/t Angry Bear)

Auerback & Wray: America Needs Healthcare, Not Health Insurance

“Private health insurance is not synonymous with healthcare. There is a big difference between levying a tax for a public good (i.e. healthcare) versus forcing people to buy a service from a private health insurance company, which is by no means synonymous with healthcare.”

Read it at Economonitor
America Needs Healthcare, Not Health Insurance
By Mashall Auerback & L. Randall Wray


Leading up to and following testimonies before the Supreme Court on the constitutionality of the individual mandate I read numerous articles from an array of sources. There appear to be legitimate arguments about why the law either does or does not violate the commerce clause. Both sides are also probably correct in noting that the decision is likely to be influenced by political preferences amongst the individual judges. (This is normal since the judges, similar to any individual, cannot divorce their judgments entirely from subjective values on which their reasoning and logic are ultimately based.) Trying to predict the outcome at this point, while attention provoking, is unlikely to offer much beneficial knowledge.

However, a related subject matter that I believe adds value to the discussion is regarding the important difference between healthcare and health insurance that Marshall Auerback and L. Randall Wray illuminate. A large majority of my friends and family are Democrats whom overwhelmingly support the idea of universal healthcare. For many of them it is immoral to deny an individual access to healthcare for varying reasons including age, sex and medical history. The Patient Protection and Affordable Care Act (PPACA), including the individual mandate, is therefore a significant achievement in the direction of universal healthcare.

During several recent conversations regarding the individual mandate, a frequent retort has been that forcing individuals to purchase a public good, healthcare, is not unconstitutional. Had the individual mandate been phrased as a tax with revenues used by the government to provide healthcare, I doubt there would have been grounds to overturn that portion of the law. Unfortunately, for those who support the PPACA, the actual law requires something entirely different from the example just mentioned.

The individual mandate, as written, requires that private individuals spend their own funds to purchase a specific private good, health insurance. Decisions regarding coverage, reimbursement and cost still largely remain with the private insurers that have their own mandate to maximize profits for shareholders. One can argue that our health care system’s reliance on a private insurance market is an immovable, impediment to universal healthcare, but this does not alter the constitutionality of the law.

It’s conceivable to envision a similar mandate in reference to the auto industry and auto insurance. Owners’ of a vehicle are currently required, by law, to purchase auto insurance although the cost varies greatly and policies can be denied to individuals. Individuals that elect not to get insurance, for whatever reason, may impose costs on others in various ways including using public transportation. From a cost-benefit and equal rights perspective, it may therefore be reasonable to mandate that all individuals purchase private auto insurance.

The issue that I foresee, is that this same line of reasoning could easily be extended to other forms of insurance including life, home/renters, flood, tornado, etc. This policy need not stop at insurance either. A recent 60 minutes video, featuring Dr. Sanjay Gupta, discusses new research on the toxic effects of sugar. Forcing consumers to purchase some percentage of privately supplied food that excludes sugar may very well improve society’s health and save costs in the long-run, but it faces a similar constitutional dilemma.

Several months will likely pass before a decision is made regarding the individual mandate and its knock-on effects on the rest of PPACA. When discussing this issue it’s important to remember that there is a significant difference between healthcare and health insurance. For those on the left, do not despair, Auerback and Wray think an opposition ruling may open the door for something better. I suggest reading their entire article for a better explanation of this distinction and a possible look into the future of healthcare after the individual mandate.